I received a notice from IRS. What should I do? If you receive a notice, don’t ignore it. If there is a problem, it won’t just go away; it will only get worse. If there is no problem, then you’ll find out right away and can stop worrying about it.
The IRS may send a letter or notice to you for a number of reasons. It may be to request payment for taxes you owe. It could be to notify you of a change to your account, showing that you owe more or maybe less tax. It could be to request additional information. Often it will be because the information on your tax return does not match the information they have. In a few cases the notice will tell you that your tax return is being audited, or you will receive a notice telling you the results of an audit.
I thought I fixed my problem, but I’m still getting notices. If you feel like your talking to the wall with the IRS, you might seek out the “Taxpayer Advocate” (formerly the Problem Resolution Office). This is an office independent of the IRS which seeks to solve difficult problems with the IRS. To learn more about the taxpayer advocate and how to use it, go to their website at http://www.irs.gov/ind_info/advocate.html. You can also contact the office through their toll free number at 1-877-777-4778.
The IRS says I did not file a return. What do I do? First determine whether or not you were required to file a return for that year. The instructions for each year tell you who needs to file a return. If you do not feel you need a return for the year, write back to the IRS and tell them why. If you do need to file a return, then it is in your best interest to do so as soon as possible. If you don’t, the IRS will file a “substitute for return” in which they take the figures they have to create a tax return for you. They determine the income from the reports they have received (such as W- 2s and 1099s). Then they give you the standard deduction and figure the tax accordingly. Having the IRS file a substitute for return will not give you the benefit of any deductions you might have, so you are almost always better off filing your own return.
Should I use a Tax Professional in dealing with the IRS? The real question is, will a tax professional save me money? This is a question that has different answers for different people. The advantages an expert has are that he or she is familiar with tax problems and with the ways to deal with the IRS. You can spend many hours trying to find an answer that an expert already knows. Also many people do not want to deal with the IRS and would rather have someone speak for them. If your tax problem is small, and if you don’t mind dealing directly with the IRS, you can probably handle your own case. You can even handle more complex problems if you have the time to spend on learning how to solve your problem. If, however, you don’t want to deal with the IRS, you will need to hire help. Also, if your case is complex or technical, you are probably best off seeking help.
Can I do anything to Minimize Taxes While you might not be able to eliminate your taxes, there are legitimate steps you can take to minimize the tax bite. There are a number of steps you can take. A few of them are listed below.
Keep good records including (1) noting dates and items and (2) keeping any receipts. Many deductions are lost each year simply because people don’t keep good records. Keeping track of things like your business travel expenses helps you remember to deduct them and also provides verification if you’re audited.
Home Mortgage Interest is one of the best deductions available. Interest deductions are available for both the principal residence and a second residence (such as a vacation home).
The Principal Residence Exclusion allows you to deduct up to $250,000 from the sale of your primary or principal residence. If you are married and file a joint tax return, it’s even better. You can deduct up to $500,000.
Salary Reduction Plans such as 401k plans, 403(b) plans, and traditional IRAs all will reduce your taxable income when you make contributions. The growth is not taxed, but it will all be taxed when you take distributions later.
Roth IRAs are not deductible but the growth is not taxed, nor are the distributions making this one of the most interesting tax reduction tools available for those looking a few years ahead.
I don’t think I owe the tax. What can I do? During an audit, you may dispute an IRS claim that you owe more taxes. If, however, it is IRS collection that says you owe the tax, you must pay the tax and then file a claim for refund. There are a few special situations where you can dispute an IRS collection claim. If you think you don’t owe the tax, you might want to talk to a tax expert about your situation.
My divorce judgment requires my ex-spouse to pay the taxes. This is a common problem. The divorce court tells your ex to pay all the taxes, but he or she doesn’t do it. Then the IRS comes looking for you. Unfortunately, the IRS can still collect from you. This may seem unfair, but under the law, if two people owe a debt, the creditor can collect from either one — even if a court tells one of them to pay the debt. You do have two possible remedies. First, you can take your ex back to the divorce court to try to force him or her to pay you back what you paid the IRS. The other is to see if you qualify for special relief from the IRS called “Innocent spouse relief.”
Can I pay my back taxes in installments?
An installment agreement is an agreement to pay the taxes over a period of time in monthly installments. If you and the IRS have an installment agreement, the IRS will not take any other collection action unless you default on the agreement.
Can I persuade the IRS to accept less than they demand? Maybe. If you can convince the IRS that you cannot pay the whole debt in a reasonable period of time, there is a process called an “Offer in Compromise” which will allow you to pay less than the whole amount. The process is time consuming and somewhat technical, and you may want to seek professional help in determining at least if you qualify for an Offer in Compromise.
Can I Discharge My Taxes in Bankruptcy? Income taxes can be discharged if you have met a number of technical requirements. This would be in a Chapter 7. A Chapter 13 reorganization can also be used to set up a payment plan. Discharging taxes in bankruptcy is quite technical, and should generally not be attempted without seeking professional help.
I was supposed to get a refund but the IRS kept it. The IRS may not audit your claim for refund, but they will probably check to see if you have any tax debts. If you do, they will seize your refund to pay those debts. If anything is left over, they will give it to you.
Tax Protesters and Other Myths. Taxes take a lot of your money, so when people tell you that you don’t really have to pay taxes, you would like to believe them. But it isn’t true; you can’t simply get out of paying taxes. While there are some legitimate ways to reduce your taxes, there are too many scams that don’t work. Remember that when promoters tell you that you can avoid all taxes, remember the general rule that, “If it sounds too good to be true, it probably is!”
There are generally two types of people promoting not paying taxes. These are tax protesters (well meaning or otherwise) and those promoting illegal or abusive trust schemes. The problem is made worse by the fact that the IRS does not move very quickly to shut them down. As a result, they often advertise that they have been around for years, and the IRS still hasn’t got them. Eventually though, the promoters are shut down leaving huge tax debts for those who bought into the scheme. Many of the schemes are found at the IRS web site www.irs.gov/irs/content/0,,id=106057,00.html. If that site is changed, then go to the main page at www.irs.gov/ and search for “Tax Scams.”
